RBI raises rates, focuses on central bank growth and inflation outlook
The Reserve Bank of India is expected to raise interest rates today for the third time since the start of the current financial year to reduce inflation from above the threshold above the central bank’s target since January. The focus shifts to the RBI’s growth and inflation outlook and the tone of the monetary policy line.
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The Monetary Policy Committee (MPC) meeting begins on Wednesday and RBI Governor Shaktikanta Das is expected to announce the Monetary Policy Committee’s decisions at 10 a.m.
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The RBI said it would scrap policies introduced as COVID-19 support, and that if the central bank raised it by at least 25 basis points, interest rates would rise to pre-pandemic levels.
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While a hike in policy rates is almost certain, analysts and economists have differing opinions on the magnitude of the rate hike. It varies from 25 basis points to 50 basis points.
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According to HDFC Bank Chief Economist Abheek Barua, the RBI is “likely to bring rates above a level considered ‘neutral’ – which we think is closer to 5.25% – before slowing down or consider becoming more data-dependent during this rate hike cycle.”
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While the current retail inflation rate is above 7%, the decline in prices of many goods is believed to be a major factor influencing the lower inflation trajectory.
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If the RBI raises the policy repo rate on Friday, which is almost certain, it will be the third consecutive increase. The central bank started tightening monetary policy at the beginning of the current financial year. In its out-of-cycle monetary policy review in May, the RBI raised the policy repo rate by 40 basis points, or 0.40%.
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It was the first policy repo rate hike in nearly two years. The repo rate is the rate at which the RBI lends short-term loans to banks. During its bimonthly policy review in June, the RBI increased the policy return rate by 50 basis points to 4.90%.
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India’s central bank worries more than just inflation. In July, the rupee’s value against the dollar fell to an all-time low above 80, forcing the RBI to use its foreign exchange reserves to prevent further damage. India’s trade deficit also increased significantly.
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A separate Reuters report suggests the Indian rupee could hit a record low if the RBI decides on a smaller gain.
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But regarding the impact of the RBI decision on the stock market, Srikanth Subramanian, Managing Director-Designate at Kotak Cherry, said, “the stock market seems to have reduced gains by 35-50 bps and so , a corresponding rate hike may not lead to a shock, especially given good earnings and economic momentum.”
